Whistleblowers | China Accounting Blog | Paul Gillis


Last week, the SEC released its first report on the Whistleblower Program that was brought in by Dodd-Frank. Under the program, informants can receive a reward if their tip leads to the SEC collecting a penalty from a securities law violator. 

Awards are made when the information submitted by the Whistleblower leads to monetary sanctions of over $1 million. Awards are required to be paid in the amount of 10% to 30% of the monetary sanctions collected.  

The SEC received 3,001 whistleblower tips in the fiscal year ended September 30. 2012.   Only one reward was paid out. On August 21, 2012, a whistleblower who helped the Commission stop an ongoing multi-million dollar fraud received an award of 30% - the maximum percentage permitted by law - of the amount collected. Although a penalty was imposed of over $1 million, the government was only able to collect $152,464 during the year so the reward was only $45,739.  The company involved is not disclosed to protect the whistleblower. 

There were 31 whistleblower tips from China (including Hong Kong (2) and Taiwan (2)). China could be a fruitful location for making whistleblower claims. There are many Chinese companies listed in the U.S. and they have had a particularly high incidence of fraud. The problem is that the fine has to be more than $1 million to qualify for a reward and the SEC has to collect the fine. I think it is going to be very difficult for the SEC to collect fines from U.S. listed Chinese companies. 

Complaints could also be filed against multinational companies for violations of the Foreign Corrupt Practices Act (FCPA). The SEC and the Department of Justice issued a new enforcement guide to the FCPA on November 14. The guide clarifies the definition of foreign officials to include many employees of state-owned enterprises, raising the risk that companies could be found to have bribed these officials. I believe many companies are vulnerable to FCPA charges for business activities that have been commonplace in China in past years. The guide points to the case against a U.S. telecommunications company for taking officials for “factory inspections” that spent most of the time at Disney World, the Grand Canyon or Las Vegas. The guide says that would clearly be considered a bribe. That was a pretty standard business practice in China for many years. Companies that continue these practices can expect that their employees will find a lucrative side employment collecting whistleblower rewards. The money can be big here. Pfizer recently agreed to pay $45 million related to illegal payments in China and other countries. 

The SEC has set aside $453 million for rewards. That is a potential source of new revenue for short sellers. In addition to taking a short position in the stock, short sellers ought to send a tip to the SEC before making their allegations public.  

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